GAZA, Nov 15 (Reuters) - A Hamas rocket killed three Israelis north of the Gaza Strip on Thursday, drawing first blood from Israel as the Palestinian death toll rose to 13 and the military showdown lurched closer to all-out war.

Israeli warplanes bombed targets in and around Gaza city, where tall buildings trembled and thick plumes of smoke and dust furled into the sky.

The Palestinian Islamist group claimed it had fired a one-tonne, Iranian-made Fajr 5 rocket at Tel Aviv in what would be a major escalation. But there was no reported impact in the Israeli metropolis 50 km (30 miles) north of the enclave.

Israel was more concerned about the mood in Egypt, whose new Islamist government brokered a truce between the two sides on Tuesday only to see it shattered a day later when Israel assassinated the top Hamas military commander.

Hamas is an offshoot of the Muslim Brotherhood which now controls Egypt, Israel's most powerful Arab neighbour and a crucial partner in the 1979 peace treaty that stands between fragile stability and regional chaos.

Cairo condemned the offensive and recalled its ambassador to Israel. Israel's ambassador left Cairo on what was called a routine home visit and Israel said its embassy would stay open.

DAY TWO

Israel's Iron Dome interceptor system shot down dozens of some 130 rockets fired from Gaza in the first few hours of daylight on day two of Operation Pillars of Defence, the army said.

But one of those that got through caught its victims before they could reach the blast shelters that are everywhere in the Negev region, prey to sporadic Palestinian rocket attacks from Gaza for the past five years.

Israeli police said the three died when a rocket hit a four-story building in the town of Kiryat Malachi, some 25 km (15 miles) north of Gaza. They were the first Israeli fatalities of the latest conflict to hit the coastal region.

Israel on Wednesday assassinated Hamas's military mastermind Ahmed Al-Jaabari and shelled the enclave from the land, sea and air, killing 13 people, including five militants, three children and a pregnant woman. More than 100 were wounded.

At his funeral on Thursday, supporters fired guns in the air celebrating news of the Israeli deaths, to chants for Jaabari of "You have won."

The U.N. Security Council held an emergency meeting late on Wednesday to discuss the Israeli assault. It called for a halt to the violence, but took no action.

Oil prices rose more than ${esc.dollar}1 in response on Wednesday.

Expecting days or more of fighting, Israel warned Hamas that all its men were targets. Israeli warplanes dropped leaflets in Gaza telling residents to keep their distance from militants and Hamas facilities.

"The leaflets stress that Hamas is dragging the region toward violence, and that the IDF is prepared to defend the residents of the State of Israel until quiet is restored to the region," the military said in a statement.

The United States condemned Hamas, shunned by the West as an obstacle to peace for its refusal to renounce violence and recognise Israel.

"There is no justification for the violence that Hamas and other terrorist organisations are employing against the people of Israel," said Mark Toner, deputy State Department spokesman.

Hamas has said the killing of its top commander would "open the gates of hell" for Israel. It also appealed to neighbouring Egypt to halt the "barbaric" assault.

"PILLAR OF DEFENCE"

Israeli Prime Minister Benjamin Netanyahu, whom opinion polls favour for victory in a Jan. 22 general election, said on Wednesday the Gaza operation could be stepped up.

His cabinet has granted authorisation for the mobilisation of military reserves if required to press the offensive, dubbed "Pillar of Defence" in English and "Pillar of Cloud" in Hebrew after the Israelites' divine sign of deliverance in Exodus.

Israel says it has already destroyed much of Gaza's longer-range rocket stockpiles, an assertion seemingly confirmed when Hamas claims of hits on ambitious targets such as Tel Aviv, Ashdod and Israeli naval craft proved unfounded.

The flare-up on Israel's southern front came in a week when, up north, it fired at Syrian artillery positions it said had shot into the Israeli-annexed Golan Heights amid a civil war in Syria that has brought renewed instability to Lebanon next door.

A second Gaza war has loomed on the horizon for months as waves of Palestinian rocket attacks and Israeli strikes grew increasingly more intense and frequent.

Israel's Operation Cast Lead in 2008-2009 began with a week of air attacks and shelling, followed by a land invasion of the blockaded coastal strip, sealed off at sea by the Israeli navy. Some 1,400 Palestinians were killed and 13 Israelis died.

Hamas has been emboldened by the Islamist rise to power in Egypt, viewing President Mohamed Mursi as a "safety net" who will not permit a second Israeli thrashing of Gaza, home to 1.7 million Palestinians.

Gaza has an estimated 35,000 Palestinian fighters, no match for Israel's F-16 fighter-bombers, Apache helicopter gunships, Merkava tanks and other modern weapons systems in the hands of a conscript force of 175,000, with 450,000 in reserve.

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